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SIBs: Private Gain or Public Good?

December 12, 2013

(Mark Rosenman, professor emeritus, Union Institute & University, is a frequent contributor to PhilanTopic. In his previous post, he argued that foundations and advocacy organizations need to rethink how their resources can be deployed to build the infrastructure and institutions of democracy in the twenty-first century.)

Rosenman_headshotNot long ago, New York City and Goldman Sachs began to experiment with a new financial instrument known as a social impact (or pay-for-success) bond that raises capital from the private sector for nonprofit social programs which in the past would have been funded largely by government. If, after an agreed-upon period of time, the program in question is able to demonstrate success, the investors are paid back, along with a profit, by their government partner. The concept has generated a fair amount of buzz, in part because deficit-strapped governments, underfunded charities, and resource-constrained foundations see SIBs as a potential new source of program dollars.

Unfortunately, the SIB model is being touted as the next best thing without any critical examination of the assumptions behind it or the funding crisis which drives it.

What, for example, would happen if taxes were cut to the point that government is hard pressed just to fund defense/public safety, entitlements, and its own operations and so has to turn to private investors who demand a profitable return to finance critical public infrastructure and nonprofit services? If some have their way, we're likely to find out.

Indeed, we've already begun to see what would happen. More than 57,000 children have lost access to Head Start services because of the sequester, even as Goldman Sachs has announced that it is launching a "social impact" investment fund to provide private capital as an alternative to public funding for early childhood education and many other nonprofit programs on the government chopping block.

We know Head Start saves government at least seven dollars for every dollar spent on it. If Goldman and Morgan Stanley have their way, we'll soon have to pay them and their clients a portion of those savings for having replaced taxpayer funding for such programs with private capital.

Let's call it what it is: private profit crowding out a public good. But how did we get here?

For more than three decades, conservatives have pushed hard to lower taxes on capital and reduce government-funded services for most of us. As right-wing activist Grover Norquist — the driving force behind the Americans for Tax Reform (ATR) Taxpayer Protection Pledge, more commonly known in Republican circles as the "no-new-taxes" pledge — famously said: "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”"

Rather than see government collect and allocate tax revenues for nonprofit programs and other services, conservatives (at least the compassionate ones) would prefer a return to the days when alms -- voluntary philanthropic contributions -- paid for "non-essential" public needs. In fact, while he was running for president in 2012, Mitt Romney argued that charitable contributions were the equivalent of taxes, a position also supported by the libertarian Cato Institute and others.

But where conservatives formerly might have seen a role for charity, Goldman Sachs and Morgan Stanley see new profit centers. They both have launched funds for investors to make a profit by replacing government funding for nonprofit programs.

Goldman, with the blessing of Bloomberg Philanthropies, pioneered the SIB concept here in the United States and is already asserting, without any evidence, that it will achieve positive outcomes for the participants in a New York City program designed to reduce recidivism among the city's juvenile offenders -- and savings for municipal government.

To be clear, the program in question -- and a host of others that might be financed by social impact bonds -- have a good chance of producing salutatory outcomes. But the question society must answer is how we wish to fund them.

Where is the wisdom in developing new opportunities that further enrich wealthy investors and financial institutions but cost government more than if the programs were funded by tax dollars or even interest-bearing government bonds (which likely would cost well under half of what these profit-seeking social investments are projected to yield, and which Goldman's executives refuse to cap)? Don't citizens have a reason to be suspicious when those most likely to profit from these new social investment schemes are often the same people working to reduce the tax revenues that would otherwise fund the programs in question? The same people, in fact, who in many cases are pushing to create tax breaks for these investment vehicles themselves.

If Goldman, Morgan Stanley, and other financial institutions are truly concerned about financing much-needed social programs, why don't they give up their prodigious tax avoidance schemes and instead support a Wall Street sales tax that raises hundreds of billions of dollars each year for public purposes? While they're at it, why don't they support reforms that prevent Nike, Apple, Microsoft, and other multinationals from using offshore tax havens to stash their profits and avoid paying over $90 billion in taxes that would otherwise flow to the U.S. Treasury?

For that matter, another 235 companies have parked more than $1.3 trillion more in profits abroad, thereby avoiding U.S. taxes on those profits. (The practice is so ingrained that when Senate Finance Committee chair Max Baucus recently offered doing away with it as a tradeoff for reducing corporate tax rates, business lobbyists pitched a fit.) In fact, the share of federal tax revenue from corporations has fallen by two-thirds since the 1950s as a result of loopholes and corporate tax breaks.

Many individuals also subscribe to the concept of tax avoidance -- including the more than 35,000 wealthy American households that paid no income tax at all in 2009 (the most recent year for which complete data is available). If they and individuals subject to the so-called "Buffett Rule" – a proposal floated by the Obama administration to apply a minimum marginal tax rate of 30 percent on individuals making more than a million dollars -- truly wanted to advance the public good, they would support the administration's proposal, resulting in an additional $40 billion in tax revenue over the next ten years -- or more than four times the amount that Goldman and Morgan Stanley together hope to leverage through the nascent "social impact" industry.

Yes, there are things to like about impact investing, including its clear focus on outcomes and the idea that more "haves" should be paying attention to social and environmental problems. But the actual implementation of the few SIBs out there has not been without problems — including the difficulty of assessing the role of funded interventions in generating positive social outcomes; the tendency to conflate "pay for success" only with programs that are financed by private capital; a focus on remediation at the expense of prevention; and the creation of a new industry of wealthy intermediaries.

Still, the fundamental problem with all these schemes is the question of how we Americans wish to meet and fund public needs.

Do we really want to provide funding for critical public goods only when it puts money in our pockets, or do we want to preserve and even strengthen the idea that we have a collective obligation to pay taxes that help to pay for those goods? Is seeking a financial return for ourselves more "American" than working collectively, through government, nonprofits and philanthropy, to serve the neediest among us, as well our own communities and commonweal?

And perhaps most importantly, are we willing to say that there should – there must -- be a realm of our national life where the market doesn't rule, where we collectively agree to put public good ahead of private profit? I, for one, hope so.

-- Mark Rosenman

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